Before we get started, this is not a recommendation or endorsement to buy any token or vault mentioned.
During the crypto bull run, early DeFi builders introduced us to decentralized options through protocols such as Hegic and Opyn. While these protocols are still working to grow deeper liquidity and building new ways to productize DeFi options, one product stood out from the rest–options vaults. Ribbon Finance pioneered using decentralized options to offer exposure to different kinds of options trading strategies managed by their own smart contracts. Unfortunately, while Ribbon grew a user community interested in options strategies, some may have failed to understand that these strategies can also result in a loss of their deposited principal.
This stems from a common issue over using yield APY or APR to compare different DeFi products. This is a very flawed way to compare some DeFi offerings, especially options vaults. The underlying options that power these strategies have weekly expiration dates, meaning a shorter timeframe for potentially realizing a profit. However, when options vaults in DeFi such as Ribbon display Total Projected Yield (APY), based on annualizing the 4-week average weekly yield generated, despite the strategy exposing vault owners to buying and selling puts/calls with weekly expirations, I think we clearly set ourselves up for a mismatch of expectations. Annualizing the performance of these options vaults doesn’t make sense when projected yield can drastically change week-to-week based on the market structure, options pricing, and countless other factors.
I am not questioning the intentions of Ribbon or any other team that advertises the performance of options using APY/APR. In fact, Ribbon provides every bit of information on their UI about the very real risk that a vault can incur a weekly